Business Context and Reporting Period
Hecla Mining Company filed its Form 10-K for the fiscal year ended December 31, 2012. The company explores, develops, produces and markets silver, gold, lead and zinc through its Greens Creek mine in Alaska and Lucky Friday mine in Idaho. Greens Creek generated essentially all 2012 sales because Lucky Friday production was suspended throughout the year.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales of products | $321.1 million | $477.6 million | Down 32.8% |
| Gross profit | $143.5 million | $265.0 million | Down 45.8% |
| Income from operations | $37.9 million | $197.6 million | Down 80.8% |
| Net income | $15.0 million | $151.2 million | Down 90.1% |
| Income applicable to common shareholders | $14.4 million | $150.6 million | Down 90.4% |
| Diluted earnings per share | $0.05 | $0.51 | Down $0.46 |
| Cash flow from operations | $69.0 million | $69.9 million | Broadly stable |
| Capital expenditures | $113.1 million cash; $129.9 million including non-cash additions | $87.5 million cash | Higher investment |
Calculated margins were approximately 44.7% gross, 11.8% operating and 4.7% net in 2012, compared with approximately 55.5%, 41.4% and 31.7%, respectively, in 2011.
- 2012 production totaled 6.39 million ounces of silver, 55,496 ounces of gold, 21,074 tons of lead and 64,249 tons of zinc.
- Greens Creek sales were $320.9 million and gross profit was $143.3 million. Its silver production declined from 6.50 million ounces in 2011 to 6.39 million ounces, while mining costs increased to $64.05 per ton from $49.31.
- Lucky Friday sales were only $0.2 million, versus $134.7 million in 2011, and the segment reported a $25.2 million operating loss. No metals were produced in 2012.
- Total cash cost per silver ounce, a non-GAAP measure, was $2.70 at Greens Creek in 2012, compared with negative $1.29 in 2011 because of higher by-product credits in the prior year.
- Cash and cash equivalents were $191.0 million at year-end, supplemented by $9.6 million of non-current investments. The company had no borrowings under its $150 million revolving credit facility and reported substantially no debt other than capital leases.
- Capital lease liabilities totaled $17.5 million, including $5.6 million current and $11.9 million non-current.
- Total assets were $1.378 billion and shareholders’ equity was $1.138 billion at December 31, 2012.
Fourth-Quarter Results
| Metric | Q4 2012 | Q4 2011 |
|---|---|---|
| Sales | $81.1 million | $102.9 million |
| Gross profit | $34.0 million | $49.8 million |
| Net income | $0.7 million | $18.6 million |
| Income applicable to common shareholders | $0.6 million | $18.4 million |
Material Changes Versus the Prior Comparable Period
- Revenue and profitability fell sharply because Lucky Friday remained shut for the full year following MSHA-required rehabilitation of the Silver Shaft and related mine access work.
- Lucky Friday incurred $25.3 million of suspension-related costs, including $6.3 million of depreciation, depletion and amortization.
- Greens Creek gross profit declined by $45.2 million, primarily because of lower silver, zinc and lead prices, lower production, and higher mining costs. Gold prices increased.
- Exploration and pre-development expense increased to $49.7 million from $31.4 million, reflecting expanded activity in Alaska, Idaho, Colorado and Mexico.
- Derivative losses were $10.5 million in 2012, compared with a $38.0 million gain in 2011. The losses primarily reflected higher lead and zinc prices.
- Provision for closed operations and environmental matters declined to $4.7 million from $9.7 million. The 2010 comparable period included a much larger $193.2 million Coeur d’Alene Basin accrual.
- Accrued reclamation and closure liabilities declined to $113.2 million from $153.8 million, primarily due to settlement payments and reclamation work.
- Common dividends paid increased to $17.1 million, or $0.06 per share, from $5.6 million in 2011. The company also repurchased 350,300 shares during 2012.
Guidance, Outlook, Risks and Unusual Items
- Limited Lucky Friday production resumed in the first quarter of 2013. Management expected a ramp-up to full production around mid-2013, subject to additional rehabilitation and MSHA clearance.
- The Lucky Friday #4 Shaft project is expected to cost approximately $200 million in total, with approximately $92 million spent through December 31, 2012. Completion was expected in 2016, but timing and cost remain subject to metal prices, regulatory requirements, liquidity and operating costs.
- Management estimated approximately $145 million of 2013 capital expenditures, including about $52 million of exploration and pre-development spending. Elsewhere in the filing, the company estimated 2013 capital expenditures at approximately $152 million; investors should reconcile these figures to the underlying guidance schedules.
- Management expected 2013 operating cash flow to be comparable to or higher than 2012 levels at then-current metal prices and believed liquidity was sufficient for the next 12 months.
- The Coeur d’Alene Basin settlement required $15 million by October 2013 and approximately $55.5 million by August 2014, with remaining amounts payable regardless of warrant exercise proceeds. The company had already paid approximately $194 million under the settlement.
- Greens Creek’s preliminary revised closure plan increased estimated undiscounted closure costs from $53.4 million to approximately $73.9 million. The company may need materially higher reclamation bond coverage.
- Key risks include silver, gold, lead and zinc price volatility; mine safety incidents; Lucky Friday regulatory enforcement; environmental liabilities; permitting delays; reserve estimation risk; cost inflation; labor relations; smelter dependence; and potential legal claims.
- Pending matters included securities and derivative shareholder litigation, a union compensation claim potentially ranging from zero to $10 million, EPA water-permit matters, and environmental claims at historical mining sites. The filing states that several matters cannot be estimated reliably.
- The company reported no material off-balance-sheet arrangements. BDO USA, LLP issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Lucky Friday achieved the planned mid-2013 return to full production and whether MSHA restrictions or further safety actions affected output.
- Actual 2013 capital spending and total cost-to-complete for the #4 Shaft project.
- Updated Greens Creek closure costs, tailings-expansion permits and required reclamation surety.
- Cash flow available after the remaining Coeur d’Alene Basin settlement payments, capital expenditures, exploration spending and dividends.
- Changes in silver, gold, lead and zinc prices and the effect of derivative contracts on realized prices and earnings.
- Developments in the pending shareholder, union, EPA and historical-site environmental proceedings.
- Whether reserve changes, grades, recoveries and mine-life assumptions support the reported asset carrying values and future production plans.